CHAPTER 7

Multiple-Choice Questions
1.
easy
Auditors must make decisions regarding what evidence to gather and how much to accumulate.
Which of the following is not a decision that must be made by auditors related to evidence
d a. Audit procedure to use.
b. !ample si"e.
c. #iming of audit procedures.
d. $ach of the above is a decision that must be made.
%. Audit procedures may be performed&
easy a. early in the accounting period being audited.
d b. throughout the period being audited with emphasis on the transactions near the end.
c. shortly after the close of the period being audited.
d. during all three of the above periods.
'.
easy
#he third standard of fieldwork re(uires the auditor to accumulate sufficient appropriate
evidence to support the opinion issued. )ecause of the nature of audit evidence* it is&
a a. unlikely the auditor will be completely convinced that the opinion is correct.
b. likely the auditor will be completely convinced that the opinion is correct.
c. unlikely the auditor will arrive at a conclusion.
d. likely that the auditor would change his+her mind about the opinion if he+she took the time
to gather additional evidence.
,. Which of the following forms of evidence is most reliable
easy a. -eneral ledger account balances.
b b. Confirmation of accounts receivable balance received from a customer. .most e/pensive0
c. 1nternal memo e/plaining the issuance of a credit memo.
d. Copy of month-end ad2usting entries.
3. Which of the following is not a characteristic of the reliability of evidence
easy a. $ffectiveness of client internal controls.
b b. $ducation of auditor.
c. 1ndependence of information provider.
d. #imeliness.
4. Which of the following is not a characteristic of the reliability of evidence
easy a. Qualification of individual providing information.
c b. Auditor5s direct knowledge.
c. 6egree of sub2ectivity.
d. 6egree of ob2ectivity.
7.
easy
Calculating the gross margin as a percent of sales and comparing it with previous periods is
what type of evidence
b a. 8hysical e/amination.
b. Analytical procedures.
c. 9bservation.
d. 1n(uiry
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:. Audit evidence obtained directly by the auditor will not be reliable if&
easy a. the auditor lacks the (ualifications to evaluate the evidence.
a b. it is provided by the client5s attorney.
c. the client denies its veracity.
d. it is impossible for the auditor to obtain additional corroboratory evidence.
;. Appropriate of evidence is a measure of the&
easy a. (uantity of evidence.
b b. (uality of evidence.
c. sufficiency of evidence.
d. meaning of evidence.
1<. Which of the following statements regarding the relevance of evidence is correct
easy a. #o be relevant* evidence must pertain to the (uestion at hand.
a b. #o be relevant* evidence must be persuasive.
c. #o be relevant* evidence must relate to multiple audit ob2ectives.
d. #o be relevant* evidence must be evaluated in terms of the general audit ob2ectives.
11. #wo determinants of the persuasiveness of evidence are&
easy a. competence and sufficiency.
c b. relevance and reliability.
c. appropriateness and sufficiency.
d. independence and effectiveness.
1%.
easy
c
#hree common types of confirmations used by auditors are .10 negative confirmations* .%0 blank
form positive confirmations* and .'0 positive confirmations with information included. 8lace the
confirmations in order of reliability from highest to lowest.
a. 1* %* '.
b. '* %* 1.
c. %* '* 1.
d. '* 1* %.
1'. When auditors use documents to support recorded transactions* the process is often called&
easy a. in(uiry.
c b. confirmation.
c. vouching.
d. physical e/amination.
1,. An e/ample of an e/ternal document is&
easy a. employees5 time reports.
b b. bank statements.
c. purchase order for company purchases.
d. carbon copies of checks.
13.
easy
A document which the auditor receives from the client* but which was prepared by someone
outside the client5s organi"ation* is a.n0&
c a. confirmation.
b. internal document.
c. e/ternal document.
d. in(uiry.
7-%
14.
easy
a
=$valuations of financial information made by a study of plausible relationships among
financial and nonfinancial data involving comparisons of recorded amounts to e/pectations
developed by the auditor> is a definition of&
a. analytical procedures.
b. tests of transactions.
c. tests of balances.
d. auditing.
17. ?nusual fluctuations occur when&
easy a. significant differences are not e/pected but do e/ist.
d b. significant differences are e/pected but do not e/ist.
c. significant differences are e/pected and do e/ist.
d. either a or b is true.
1:. When analytical procedures reveal no unusual fluctuations* the implication is that&
easy a. there are no material errors or irregularities.
d b. there are no material errors.
c. there are no material irregularities.
d. the possibility of a material error or irregularity is lessened.
1;. Which of the following is not a purpose of analytical procedures
easy a. ?nderstand the client5s industry.
c b. Assess the client5s ability to continue as a going concern.
c. 1dentify misstatements.
d. @educe detailed audit tests.
%<.
medium
Which of the following forms of evidence would be least persuasive in forming the auditor5s
opinion
a a. @esponses to auditor5s (uestions by the president and controller regarding the investments
account.
b. Correspondence with a stockbroker regarding the (uantity of client5s investments held in
street name by the broker.
c. Minutes of the board of directors authori"ing the purchase of stock as an investment.
d. #he auditor5s count of marketable securities.
%1. Which of the following statements is not true =#he evidence-gathering techni(ue of in(uiry&
medium a. cannot be regarded as conclusive.>
c b. re(uires the gathering of corroborative evidence.>
c. is the auditor5s principal method of evaluating the client5s internal control.>
d. does not provide evidence from an independent source.>
%%. .!9A0
medium
!arbanes-9/ley re(uires auditors of public companies to maintain audit documentation for what
period of time
c a. Bot less than ' years.
b. Bot less than 3 years.
c. Bot less than 7 years.
d. Bone of the above.
7-'
%'. .!9A0
medium
!arbanes-9/ley has CCCCCC the amount of audit documentation that must be retained for audits
of public companies.
c a. had little effect on
b. dramatically reduced
c. significantly increased
d. slightly increased
%,. Which of the following statements is not correct
medium a. 1t is possible to vary the sample si"e from one unit to 1<<D of the items in the population.
b b. #he decision of how many items to test will not be influenced by the increased costs of
performing the additional tests.
c. #he decision of how many items to test must be made by the auditor for each audit
procedure.
d. #he sample si"e for any given procedure is likely to vary from audit to audit.
%3.
medium
=#he detailed description of the results of the four evidence decisions for a specific audit> is
recorded on an&
b a. audit procedure.
b. audit program.
c. audit dictionary.
d. audit guide.
%4. Auditors will replace tests of details with analytical procedures when possible because the&
medium a. analytical procedures are more reliable.
b b. tests of details are more e/pensive.
c. analytical procedures are more persuasive.
d. tests of details are more difficult to interpret.
%7. Which of the following statements is not correct
medium a. 8ersuasiveness of evidence is partially determined by the reliability of evidence.
c b. #he (uantity of evidence obtained determines its sufficiency.
c. #he auditor need not consider the independence of an information source when obtaining
evidence.
d. $vidence obtained directly by the auditor is ordinarily more reliable than evidence
obtained from other sources.
%:. Which one of the following is not one of the primary purposes of audit documentation
medium a. A basis for planning the audit.
d b. A record of the evidence accumulated and the results of the tests.
c. A basis for review by supervisors and partners.
d. A basis for determining work deficiencies by peer review teams.
%;. Which of the following is not a type of audit evidence
medium a. Auditor discussion with client employees.
d b. $/amination of credit memos issued at the end of the year.
c. @ecalculation of discounts issued on sales invoices.
d. All of the above are types of audit evidence.
7-,
'<.
medium
When the auditor is gathering evidence* if the source of the evidence is independent of the
client* the evidence is normally&
c a. not reliable.
b. reliable.
c. not reliable unless the provider is (ualified to provide the evidence.
d. reliable if the provider has no reason to be biased.
'1. Which of the following is an e/ample of objective evidence
medium a. A letter written by client5s attorney discussing the likely outcome of outstanding lawsuits.
b b. #he physical count of securities and cash.
c. 1n(uiries of the credit manager about the collectibility of noncurrent accounts receivable.
d. 9bservation of cobwebs on some inventory bins.
'%. Most auditors would consider samples to be insufficient if they contain only the
medium a. largest dollar items from the population.
a b. largest dollar items from a population* even though these items make up a large portion of
the total population.
c. items with a high likelihood of misstatement.
d. items that are representative of the population.
''. Which of the following statements regarding documentation is not correct
medium
b
a. 6ocumentation includes e/amining client records such as general ledgers and supporting
2ournals.
b. 1nternal documents are documents that are generated within the company and used to
communicate with e/ternal parties.
c. $/ternal documents are documents that are generated outside of the company and are used
to communicate the results of a transaction.
d. All of the above are correct statements.
',.
medium
c
When making decisions about evidence for a given audit* the auditor5s goal is to obtain a
sufficient amount of timely* reliable evidence that is relevant to the information being verified*
and to do so&
a. no matter the cost involved in obtaining such evidence.
b. at any cost because the costs are billed to the client.
c. at the lowest possible total cost.
d. Bone of the above.
'3. 8hysical e/amination is the inspection or count by the auditor of items such as&
medium a. cash or inventory only.
d b. cash* inventory* canceled checks* and sales documents.
c. cash* inventory* canceled checks* and tangible fi/ed assets.
d. cash* inventory* securities* notes receivable* and tangible fi/ed assets.
'4. Which of the following is an e/ample of vouching
medium a. #race inventory purchases from the ac(uisitions 2ournal to supporting invoices.
a b. #race selected sales invoices to the sales 2ournal.
c. #race details of employee paychecks to the payroll 2ournal.
d. All of the above are e/amples of vouching.
7-3
'7. Which of the following statements about confirmations is true
medium a. Confirmations are e/pensive and so are often not used.
b b. Confirmations may inconvenience those asked to supply them* but they are widely used.
c. Confirmations are sometimes not reliable and so auditors use them only as necessary.
d. Bone of the above statements are true.
':. #raditionally* confirmations are used to verify&
medium a. individual transactions between organi"ations* such as sales transactions.
b b. bank balances and accounts receivables.
c. fi/ed asset additions.
d. all three of the above.
';. #o be considered reliable evidence* confirmations must be controlled by&
medium a. a client employee responsible for accounts receivable.
b b. a financial statement auditor.
c. a client5s internal audit department.
d. any of the above.
,<. When practical and reasonable* the confirmation of a sample of accounts receivable is&
medium a. not useful in most audits.
c b. rarely performed.
c. re(uired.
d. optional.
,1.
medium
#he Auditing !tandards )oard has concluded that analytical procedures are so important that
they are re(uired during&
b a. planning and testing phases.
b. planning and completion phases.
c. testing and completion phases.
d. planning* testing* and completion phases.
,%. Which of the following statements regarding analytical procedures is not correct
medium a. #he definition of analytical tests emphasi"es a comparison of client5s data to -AA8.
a b. Analytical procedures are re(uired on all audits.
c. Analytical procedures can be used as substantive tests.
d. Eor certain accounts with small balances* analytical procedures alone may be sufficient
evidence.
,'.
medium
A benefit obtained from comparing the client5s data with industry averages is that it provides
a.n0&
a a. indication of the likelihood of financial problems.
b. indication where errors e/ist in the statements.
c. benchmark to be used in evaluating a client5s budgets.
d. comparison of =what is> with =what should be.>
,,.
medium
d
#he primary purpose of performing analytical procedures in the testing phase of an audit is to&
a. help the auditor obtain an understanding of the client5s industry and business.
b. assess the going concern assumption.
c. indicate possible misstatements.
d. reduce detailed tests.
7-4
,3. Which of the following is not a correct combination of terms and related type of audit
evidence
medium a. Eoot F reperformance.
d b. Compare F documentation.
c. Gouch F documentation.
d. #race F analytical procedures.
,4. Which of the following is not a correct combination of terms and related type of audit
evidence
medium a. 1n(uire F in(uiries of client.
c b. Count F physical e/amination.
c. @ecompute F documentation.
d. @ead F documentation.
,7. Which of the following is not one of the ma2or types of analytical procedures
medium a. Compare client with industry averages.
d b. Compare client with prior year.
c. Compare client with budget.
d. Compare client with !$C averages.
,:. What is the overall ob2ective of audit documentation
medium a. 6efend against claims of a deficient audit.
c b. 8rovide a basis for reviewing the work of subordinates.
c. 8rovide reasonable assurance that the audit was conducted in accordance with standards.
d. Bone of the above.
,;. An important benefit of industry comparisons is as&
medium a. an aid to understanding the client5s business.
a b. an indicator of errors.
c. an indicator of irregularities.
d. a least-cost indicator for audit procedures.
3<. #he permanent files included as part of audit documentation do not normally include&
medium a. a copy of the current and prior years5 audit programs.
a b. copies of articles of incorporation* bylaws and contracts.
c. information related to the understanding of internal control.
d. results of analytical procedures from prior years.
31.
medium
Begative confirmations of receivable are less effective than positive confirmations of
receivables because&
b a. they do not produce evidence that is statistically (uantifiable.
b. the auditor cannot infer that all non-respondents have verified their account information.
c. some recipients may report incorrect balances that re(uire e/tensive follow-up.
d. a ma2ority of recipients usually lack the willingness to respond ob2ectively.
3%. An auditor would be least likely to use confirmations in connection with the e/amination of&
medium a. inventories.
c b. long-term debt.
c. property* plant* and e(uipment.
d. stockholders5 e(uity.
3'. #hose procedures specifically outlined in an audit program are primarily designed to
medium a. prevent litigation.
d b. detect errors or irregularities.
c. test internal systems.
d. gather evidence.
7-7
3,. $vidence is generally considered appropriate when&
medium a. it has been obtained by random selection.
c b. there is enough of it to afford a reasonable basis for an opinion on financial statements.
c. it has the (ualities of being relevant* ob2ective* and free from known bias.
d. it consists of written statements made by managers of the enterprise under audit.
33.
challenging
-iven the economic constraints in which auditors collect evidence* the auditor normally gathers
evidence that is&
c a. irrefutable.
b. conclusive.
c. persuasive.
d. completely convincing.
34.
challenging
#he auditor is concerned that a client is failing to bill customers for shipments. An audit
procedure that would gather relevant evidence would be to&
b a. select a sample of duplicate sales invoices and trace each to related shipping documents.
b. trace a sample of shipping documents to related duplicate sales invoices.
c. trace a sample of !ales Hournal entries to the Accounts @eceivable subsidiary ledger.
d. compare the total of the !chedule of Accounts @eceivable with the balance of the
Accounts @eceivable account in the general ledger.
37. @elevance can be considered only in terms of&
challenging a. general audit ob2ectives.
b b. specific audit ob2ectives.
c. transaction audit ob2ectives.
d. balance audit ob2ectives.
3:.
challenging
Audit documentation should possess certain characteristics. Which of the following is not one
of the important characteristics
d a. Audit files should be properly identified.
b. Audit documentation should be inde/ed and cross-referenced.
c. Audit documentation should clearly indicate the audit work performed.
d. All of the above are essential characteristics.
3;. Which of the following statements is not a correct use of the terminology
challenging
b
a. $vidence obtained from an independent source outside the client organi"ation is more
reliable than that obtained from within.
b. 6ocumentary evidence is more reliable when it is received by the auditor directly from an
independent third party.
c. 6ocuments that originate outside the company are considered more reliable than those that
originate within the client5s organi"ation.
d. $/ternal evidence* such as communications from banks* is generally regarded as more
reliable than answers obtained from in(uiries of the client.
4<. $vidence is usually more persuasive for balance sheet accounts when it is obtained&
challenging a. as close to the balance sheet date as possible.
a b. only from transactions occurring on the balance sheet date.
c. from various times throughout the client5s year.
d. from the time period when transactions in that account were most numerous during the
fiscal period.
7-:
41. Which of the following statements is not correct concerning audit documentation
challenging
a
a. Audit documentation is merely re(uired to defend against claims that the auditor
performed a deficient audit.
b. #he only time anyone has a legal right to e/amine audit documentation is when the
documentation is subpoenaed by a court as legal evidence.
c. Audit documentation is the primary frame of reference used by supervisory personnel to
evaluate the sufficiency of evidence.
d. All of the above are incorrect statements.
4%. Which of the following statements is not true
challenging
d
a. A large sample of highly competent evidence is not persuasive unless it is relevant to the
ob2ective being tested.
b. A large sample of evidence that is neither competent nor timely is not persuasive.
c. A small sample of only one or two pieces of relevant* competent* and timely evidence
lacks persuasiveness.
d. #he persuasiveness of evidence can be evaluated after considering its competence and its
sufficiency.
4'. Which of the following statements is not correct
challenging
d
a. Analytical procedures are used to isolate accounts or transactions that should be
investigated more e/tensively.
b. Eor certain immaterial accounts* analytical procedures may be the only evidence needed.
c. 1n some instances* other types of evidence may be reduced when analytical procedures
indicate that an account balance appears reasonable.
d. Analytical procedures use comparisons and relationships to determine which account
balances are in error.
4,. Which of the following statements is not correct
challenging
b
a. #he effectiveness of the client5s internal control has a significant effect on the reliability of
most types of evidence.
b. !ince the auditor performs analytical procedures* these will be reliable even if internal
controls provide inaccurate data.
c. )oth physical e/amination and mechanical accuracy are likely to be highly reliable if the
internal control is effective.
d. A specific type of evidence is rarely sufficient by itself to provide reliable evidence to
satisfy any audit ob2ective.
43.
challenging
a
Audit evidence supporting the financial statements consists of the underlying accounting data
and all corroborating information available to the auditor. Which of the following is an e/ample
of corroborating information
a. Minutes of meetings.
b. -eneral and subsidiary ledgers.
c. Accounting manuals.
d. Worksheets supporting cost allocations.
7-;
44.
challenging
Which of the following discoveries through the use of analytical procedures would indicate a
relatively high risk of financial failure
d a. A decline in gross margin percentages.
b. An increase in the balance in fi/ed assets.
c. An increase in the ratio of allowance for uncollectible accounts to gross accounts
receivable* while at the same time accounts receivable turnover also decreased.
d. A higher than normal ratio of long-term debt to net worth as well as a lower than average
ratio of profits to total assets.
47. Which of the following statements is correct regarding the costs involved in obtaining
evidence
challenging a. Cost of obtaining evidence is a valid reason for e/cluding that evidence from the audit.
b b. 8hysical e/amination is the most e/pensive type of audit evidence.
c. #he least e/pensive type of evidence is analytical procedures.
d. $ach of the above is correct.
4:.
challenging
A common comparison occurs when the auditor calculates the e/pected balance and compares it
with the actual balance. #he auditor5s e/pected account balance may be determined by&
c a. using industry standards.
b. using 6un and )radstreet reports.
c. relating it to some other balance sheet or income statement account or accounts.
d. in(uiry of the client.
4;. #wo analytical procedures available to the auditor are&
challenging Compare current year5s balances with the preceding year.
b Compare details of a particular account5s balance with the preceding year.
!hortcomings of these two procedures are that&
a. the first ignores relationships of data to other data and the second fails to consider growth
or decline in business activity.
b. the first fails to consider growth or decline in business activity and the second ignores
relationships of data to other data.
c. both fail to consider growth or decline in business activity and ignore relationships of data.
d. it is difficult* time consuming* and* therefore* costly to perform these procedures.
7<.
challenging
Which of the following statements relating to the competence of evidential matter is always
true
d a. $vidence from outside an enterprise is always reliable.
b. Accounting data developed under satisfactory conditions of internal control are more
relevant than data developed under unsatisfactory internal control conditions.
c. 9ral representations made by management are not reliable evidence.
d. $vidence must be both reliable and relevant to be considered appropriate.
7-1<
$ssay Questions
71.
easy
9ne purpose of performing analytical procedures in the planning phase of an audit is to assess
the client5s financial condition. $/plain how the assessment of a client5s financial condition can
affect the auditor5s decisions concerning evidence accumulation in later phases of the audit.
Answer&
All things being e(ual* the weaker the client5s financial condition* the more assurance the
auditor will re(uire that the financial statements are free of material misstatements. As the
auditor re(uires greater assurance* he or she can .10 perform detailed testing closer to the
balance sheet date* .%0 increase the e/tent of detailed testing* or .'0 perform more reliable
procedures. 1n e/treme cases* however* if the auditor believes the entity is not a going
concern* he or she may withdraw from the engagement and perform no additional tests.
7%.
medium
6istinguish between internal documentation and e/ternal documentation as types of audit
evidence. -ive two e/amples of each. Which type is considered more reliable
Answer&
1nternal documentation involves the auditor5s e/amination of documents that have been
prepared and used within the client5s organi"ation and are retained without ever going to
an outside party. $/amples would include duplicate sales invoices* employees5 time
reports* and inventory receiving reports.
$/ternal documentation involves the auditor5s e/amination of documents that have been in
the hands of someone outside the client5s organi"ation. $/amples include vendors5
invoices* cancelled checks* cancelled notes payable* and insurance policies.
$/ternal documents are regarded as more reliable evidence than internal documents.
7'.
medium
1dentify the three common types of confirmations used by auditors. 1ndicate which type is most
reliable and e/plain your answer. 1n addition* indicate which type is least reliable and e/plain
your answer.
Answer&
1n order of reliability* the three common types of confirmations used by auditors are&
positive confirmation with a re(uest for information to be supplied by the recipient.
positive confirmation with the information to be confirmed included on the form.
negative confirmation.
#he positive confirmation with a re(uest for information to be supplied by the recipient is
the most reliable because the recipient must supply the information from his or her
records. 1f this information agrees with the information in the client5s records* the
likelihood that the information is correct is high. #he positive confirmation with the
information to be confirmed included on the form is not as reliable as the first type
because the recipient may sign and return the confirmation without carefully e/amining
the information. #he negative confirmation is the least reliable because a nonresponse
could be due to either the recipient agreeing with the information or the recipient ignoring
the confirmation re(uest.
7-11
7,.
medium
#here are four important purposes of analytical procedures. 1dentify each of these four purposes
and* for each purpose* give a specific e/ample of an analytical procedure that an auditor might
perform.
Answer&
Eour important purposes of analytical procedures are&
#o help the auditor understand the client5s industry and business* the auditor might
analy"e recent trends in the client5s gross margin percentages to assess the effects of
competition in the industry.
#o aid in the assessment of the client5s ability to continue as a going concern* the
auditor might analy"e several of the client5s key ratios including the ratio of long-term
debt to net worth* the ratio of profits to total assets* and the current ratio.
#o indicate the presence of possible misstatements in the financial statements* the
auditor might compare the current year5s unaudited account balances with the
previous year5s audited balances.
#o reduce the e/tent of detailed tests* the auditor might perform a simple analytical
procedure such as multiplying the client5s monthly rent times 1% as a test of the
client5s rent e/pense account. 1f the product agrees with the balance in rent e/pense*
no additional testing of the account may be necessary.
73.
medium
6iscuss how each of the following influences the persuasiveness of evidence.
1. @elevance
%. 1ndependence of provider
'. $ffectiveness of client5s internal controls
,. Auditor5s direct knowledge
3. 6egree of ob2ectivity
Answer&
1. @elevance F $vidence must pertain to the audit ob2ective if it is to be persuasive.
@elevance must be considered in terms of specific audit ob2ectives as evidence may
be relevant to one ob2ective and not another.
%. 1ndependence of provider F $vidence obtained from a source outside the entity is
more reliable and persuasive than that obtained from within.
'. $ffectiveness of client5s internal controls F When a client5s internal controls are
effective* evidence obtained is more reliable than when they are weak.
,. Auditor5s direct knowledge F $vidence obtained directly by the auditor through
physical e/amination* observation* computation and inspection is more competent
than information obtained indirectly.
3. 6egree of ob2ectivity F 9b2ective evidence is more reliable than evidence that
re(uires considerable 2udgment to determine whether it is correct.
7-1%
74.
medium
-ive two e/amples of relatively reliable documentation and two e/amples of less reliable
documentation. What characteristics distinguish the two
Answer&
$/amples of relatively reliable documents include vendors5 statements* cancelled notes
payable* insurance policies* and bank statements. $/amples of less reliable documents
include duplicate sales invoices* employees5 time reports* inventory receiving reports* and
internal memoranda.
#he primary characteristic that distinguishes the two is whether the document is an
e/ternal document .the document has been in the hands of someone outside the client5s
organi"ation who is a party to the transaction0* or an internal document. $/ternal
documents are considered to be more reliable than internal documents.
77. 6iscuss the auditor5s use of documentation as evidence.
medium
Answer&
6ocumentation is the auditor5s e/amination of the client5s documents and records to
substantiate the information that either is included or should be included in the financial
statements. 6ocuments that the auditor e/amines may either be classified as e/ternal
documents or internal documents. $/ternal documents are those that have been in the
hands of someone outside of the client5s organi"ation who is a party to the transaction
being documented. 1nternal documents are those that have been prepared and used within
the client5s organi"ation without ever being in the custody of an e/ternal party. #he
primary determinant of the auditor5s willingness to accept a document as reliable evidence
is whether it is internal or e/ternal* and* when internal* whether it was created and
processed under conditions of effective internal control.
7:.
challenging
#he auditor5s decisions regarding evidence accumulation can be broken into four subdecisions.
9ne decision relates to determining the nature of the audit procedure to be used to collect the
evidenceI i.e.* =which audit procedures to use.> 1dentify and discuss the remaining three audit
evidence decisions that the auditor makes.
Answer&
#he remaining three audit evidence decisions are&
What sample size to select for a given procedure. #his decision relates to the extent of
testing to be performed. 9nce the auditor has identified which procedure to perform*
he or she needs to decide the appropriate number of items in the population to testJ
ranging from one to all items in the population.
Which items to select from the population. 9nce the auditor has decided the
appropriate number of items to test* he or she needs to decide which particular items
in the population to e/amine.
When to perform the procedures. #his decision relates to the timing of the testing to be
performed. Audit procedures related to balance sheet accounts which are performed
close to the balance sheet date are generally considered more reliable than procedures
performed during the interim period.
7-1'
7;.
challenging
#he reliability of evidence refers to the degree to which evidence is considered believable or
trustworthy. #here are five factors that affect the reliability of audit evidence. 9ne factor is the
independence of the providerI i.e.* evidence obtained from a source outside the client company
is more reliable than that obtained within. 1dentify and discuss the remaining four factors that
affect the reliability of evidence.
Answer&
#he remaining four factors that affect the reliability of evidence are&
Effectiveness of clients internal control. When a client5s internal controls are
effective* evidence obtained from the client is more reliable than when controls are
weak.
Auditors direct knowledge. $vidence obtained directly by the auditor is more reliable
than information obtained indirectly.
Qualifications of individuals providing the information. 1nformation obtained from
persons not familiar with the business world would generally not be considered as
reliable as information from an e/pert in a business-related field.
Degree of objectivit. 9b2ective evidence is more reliable than evidence that re(uires
considerable 2udgment to determine whether it is correct.
:<.
challenging
6efine the following terms commonly used in audit procedures&
1. $/amine
%. !can
'. Compute
,. Eoot
3. Compare
4. Count
7. Gouch
Answer&
1. $/amine F A reasonably detailed study of a specific document or record to determine
specific facts about it.
%. !can F A less detailed e/amination of a document or record to determine whether
there is something unusual warranting further investigation.
'. Compute F A calculation done by the auditor independent of the client.
,. Eoot F Addition of a column of numbers to determine whether the total is the same as
the client5s.
3. Compare F A comparison of information in two different locations.
4. Count F A determination of assets on hand at a given time. #his is associated with
evidence defined as physical e/amination.
7. Gouch F #he use of documents to verify recorded transactions or amounts.
7-1,
9ther 9b2ective Answer Eormat Questions
:1.
medium
)elow are 1% audit procedures. Classify each procedure according to the following types of
audit evidence& .10 physical e/amination* .%0 confirmation* .'0 documentation* .,0 observation*
.30 in(uiry of the client* .40 reperformance* and .70 analytical procedure.
#ype of $vidence
Audit 8rocedures
1. Watch client employees count inventory to determine whether company procedures are
being followed.
%. Count inventory items and record the amount in the audit files.
'. #race postings from the sales 2ournal to the general ledger accounts.
,. Calculate the ratio of cost of goods sold to sales as a test of overall reasonableness of gross
margin relative to the preceding year.
3. 9btain information about the client5s internal controls by asking (uestions of client
personnel.
4. #race column totals from the cash disbursements 2ournal to the general ledger.
7. $/amine a piece of e(uipment to make sure a recent purchase of e(uipment was actually
received and is in operation.
:. @eview the total of repairs and maintenance for each month to determine whether any
month5s total was unusually large.
;. Compare vendor names and amounts on purchases invoices with entries in the purchases
2ournal.
1<. Eoot entries in the sales 2ournal to determine whether they were correctly totaled by the
client.
11. Make a surprise count of petty cash to verify that the amount of the petty cash fund is
intact.
1%. 9btain a written statement from the client5s bank stating the client5s year-end balance on
deposit.
Answer&
1. 9bservation
%. 8hysical e/amination
'. @eperformance
,. Analytical procedure
3. 1n(uiry of the client
4. @eperformance
7. 8hysical e/amination
:. Analytical procedure
;. 6ocumentation
1<. @eperformance
11. 8hysical e/amination
1%. Confirmation
7-13
:%.
medium
Match nine of the terms .a-k0 with the definitions provided below .1-;0&
a. Eoot
b. Compute
c. !can
d. 1n(uire
e. Count
f. #race
g. @ecompute
h. @ead
i. $/amine
2. 9bserve
k. Compare
b 1. A calculation done by the auditor independent of the client.
a %. Addition of a column of numbers to determine if the total is the same as the
client5s.
k '. A comparison of information in two different locations.
2 ,. A use of the senses to assess certain activities.
f 3. Eollowing details of transactions from original documents to 2ournals.
c 4. A less detailed e/amination of a document or record to determine if there is
something unusual warranting further investigation.
d 7. 9btaining information from the client in response to specific (uestions.
e :. A determination of assets on hand at a given time.
h ;. An e/amination of written information to determine facts pertinent to the audit.
7-14
:'. Match five of the terms .a-h0 with the definitions provided below .1-30&
medium
a. Audit documentation
b. Audit procedures
c. Audit ob2ectives
d. Analytical procedures
e. )udgets
f. @eliability of evidence
g. !ufficiency of evidence
h. 8ersuasiveness of evidence
d 1. ?se of comparisons and relationships to assess the reasonableness of account
balances.
b %. 6etailed instructions for the collection of a type of audit evidence.
f '. #he degree to which evidence can be considered believable or trustworthy.
a ,. Contains all the information that the auditor considers necessary to conduct an
ade(uate audit and to provide support for the audit report.
g 3. #his is determined by the amount of evidence obtained.
:,.
medium
)elow are 1< documents typically e/amined during an audit. Classify each document as either
internal or e/ternal.
#ype of
6ocument
6ocuments
1. Canceled checks for payments of accounts payable.
%. 8ayroll time cards.
'. 6uplicate sales invoices.
,. Gendors5 invoices.
3. )ank statements.
4. Minutes of the board of directors5 meetings.
7. !igned lease agreements.
:. Botes receivable.
;. !ubsidiary accounts receivable records.
1<. @emittance advices.
Answer&
1. $/ternal 4. 1nternal
%. 1nternal 7. $/ternal
'. 1nternal :. $/ternal
,. $/ternal ;. 1nternal
3. $/ternal 1<. $/ternal
7-17
:3.
easy
b
Cost should never be a consideration when making decisions about evidence for a given audit.
a. #rue
b. Ealse
:4.
easy
a
Confirmations are among the most e/pensive type of evidence to obtain.
a. #rue
b. Ealse
:7.
easy
b
9bservation is normally more reliable than physical e/amination.
a. #rue
b. Ealse
::.
easy
b
1n(uiries of the client are usually sufficient to provide appropriate evidence to satisfy an audit
ob2ective.
a. #rue
b. Ealse
:;.
easy
b
A canceled check written by the client* made payable to a local supplier and drawn on the
client5s bank account is one type of internal document.
a. #rue
b. Ealse
;<.
easy
a
Whenever practical and reasonable* the confirmation of accounts receivable is re(uired of
C8As.
a. #rue
b. Ealse
;1.
easy
a
1n(uiries of clients and reperformance normally have a low cost associated with them.
a. #rue
b. Ealse
;%.
easy
b
When analytical procedures reveal unusual fluctuations in an account balance* the auditor will
probably perform fewer tests of details for that account and increase the tests of controls related
to the account.
a. #rue
b. Ealse
;'.
easy
a
#he type of audit evidence known as in(uiry re(uires the auditor to obtain oral information
from the client in response to (uestions.
a. #rue
b. Ealse
;,.
medium
b
9ne of the primary determinants of the reliability of audit evidence is the (uantity of evidence.
a. #rue
b. Ealse
;3.
medium
b
Audit documentation is the 2oint property of the auditor and the audit client.
a. #rue
b. Ealse
7-1:
;4.
medium
a
9b2ective evidence is more reliable* and hence more persuasive* than sub2ective evidence.
a. #rue
b. Ealse
;7.
medium
a
9rdinarily* audit documentation can be provided to someone else only with the e/press
permission of the client.
a. #rue
b. Ealse
;:.
medium
a
Analytical procedures must be used in the planning and completion phases of the audit.
a. #rue
b. Ealse
;;.
medium
a
Confirmations are ordinarily used to verify account balances* but may be used to verify
transactions.
a. #rue
b. Ealse
1<<.
medium
a
9f the three common types of confirmations used by auditors* the least reliable type is the
negative confirmation.
a. #rue
b. Ealse
1<1.
medium
b
Accounts receivable confirmations must be controlled by the client from the time they are
prepared until the time they are returned to the auditor.
a. #rue
b. Ealse
1<%.
medium
a
Cost is never an ade(uate 2ustification for omitting a necessary procedure or not gathering an
ade(uate sample si"e.
a. #rue
b. Ealse
1<'.
medium
b
Analytical procedures can be used to provide reliable substantive evidence for all balance-
related audit ob2ectives.
a. #rue
b. Ealse
1<,.
medium
b
9ne advantage of using statistical techni(ues when performing analytical procedures is that they
eliminate the need for auditor 2udgment.
a. #rue
b. Ealse
1<3.
medium
a
@elevance of evidence can only be considered in terms of specific audit ob2ectives.
a. #rue
b. Ealse
7-1;